Sunday, July 24, 2011

By now everyone who reads this blog has heard of the tragic events in Norway. A radical, right-wing populist blew up a car bomb in front of the office building containing the Prime Minister's office, killing seven, then drove to a summer camp for the youth organization of the Norwegian Labor Party where he killed another 85 or so innocent people. The murderer was eventually caught alive and has confessed to the mass murder.

He targeted members of the Labor Party because he associates them with the generally welcoming attitude towards immigrants that has typified Scandinavian politics for most of the post WWII era. I strongly suspect his goal in murdering so many of the party's youth organization was to sabotage that party's future. I strongly suspect he may only have succeeded in radicalizing the Labor Party (the largest party in Norway) and encourage them to lead the charge against right wing populism.

He was a former member of the youth organization of a rival party in Norway, the Progress Party. The Progress Party is a far right wing populist party known for its antipathy to taxes, the welfare state and multiculturalism and immigration. The Progress Party is part of a cluster of right wing populist parties that emerged in Denmark, Norway and Sweden in the 1970s and 1980s. Today, these parties include the Norwegian Progress Party, the Danish Peoples Party (formerly the Progress Party) and the Swedish Democrats. Despite their progressive sounding names, these parties are typically nationalist, socially conservative, xenophobic and fiscally populist. In short, if an American were trying to figure out who these parties are, thinking of them as the Scandinavian answer to the "Tea Party" wouldn't be a bad start. Like the Tea Party, they often oppose the welfare state in the general rhetorical stance but just as often support aspects of it that can be restricted to those members of society they deem to be deserving (a status often implicitly or explicitly dependent on ethnicity). Also like the Tea Party they are vehemently opposed to immigration. In Scandinavia the most visible immigrant population comes from Turkey and the Middle East. Slogans like "Danmark for Danskerne" (Denmark for the Danes) and "Bevara Sverige Svenskt" (Keep Sweden Swedish) are typical of the kind of rhetoric these parties like to use. As are patently absurd claims such as Norwegian Progress Party's leader, Siv Jensen's claim that Sharia law had replaced Swedish law in Sweden.

The popularity of these parties has been rising for some time. In Denmark, the mainstream conservative coalition of the Liberal Party and the Conservative People's Party depends on votes from the Danish People's Party to pass legislation. In Norway the social democratic Labor Party governs but the Progress Party is probably the fastest growing party in the country. That said, these parties usually represent between 15% and 30% of the voters and usually closer to 15% than 30%.

The fact that the worst case of political violence in Scandinavia since the liberation of Denmark and Norway from Nazi Occupation was perpetrated by a long time supporter/member of such a party may prove to be a major development not just in Norway but in Denmark as well. Denmark's government is constitutionally required to hold an election no later than November of this year. Danish voters will know the Norwegian Progress Party very well and they will understand the issues involved and the inflammatory rhetoric in play very well. The Danish People's Party will have to be careful to distance themselves from the violence without alienating their populist base of support. Many Danes will see a direct connection between the over the top xenophobia and populism of these parties and their leaders. One consequence of these tragic murders could be the decline of the electoral success of these parties and a policy backlash against their views.

This is not to say that these countries will open up to unrestricted immigration, but the increasingly aggressive escalation of policy attacks on immigrants and immigration may stop for a time.

Monday, July 18, 2011

For all you LOST fans, think about the season they found the bunker. In the bunker, there was a computer system. And every so many hours, a code had to be plugged into the system. If not, they were told that the Island would explode, and take them all out. So they entered the code. But this raised a philosophical question: what would happen if they didn’t enter the code? Would the Island really explode? How risky is risk? Was this really a manipulative game? In one scene, they decide to dare the system by refusing to put in the code, and this scary countdown starts. And suddenly,the characters are fist fighting and trying to hold each other back. But someone breaks through and enters the code. Welcome to the debt ceiling debate. Mark my words, this will happen.

But for shits, what will happen if we don’t enter the code? The Tea Partiers will have us believe that nothing will happen. But what would be the benefit? Robert Rubin, the former treasury secretary, said it best. He said, “we don't know what will happen, but why would you want to find out?” Didn’t we learn anything from the brink of disaster in 2008? Why would you want to take bigger risks? Is it for the adrenaline rush?

The Debt Ceiling is an arbitrary number that limits the amount of money we can borrow to pay our bills. It was sent by our legislators in 1917 and has been changed numerous times. Between 2001 and 2008, it was increased 5 times. Any small business owner who was unable to get a short term bank loan to cover payroll back in 2008 will understand completely the situation the US Treasury now faces. I am sure you yourself have borrowed from your savings to cover your bills, and then put it back. Maybe you ask your friend to spot you $50 with the promise to pay back $55 in a week, etc. It’s no different for the Feds.

For our readers who may not fully understand the debt, please read The Debt Limit: History and Recent Increases by the Congressional Research Service. This explains nicely how the government creates both Public and Inter-government debt. The short version is that debt is issued is through the sale of government (i.e. Treasury) bonds of varying duration. The US government currently pays the lowest interest of anyone on these bonds because it is deemed so low risk. This will change if default happens. For lessons, see Argentina.

The amount of government debt and revenue is in constant flux. Money comes in, money goes out. This further complicates the Treasury’s job of balancing the government’s check book. Because of the flux, Treasury can’t know for sure when we will actually run out of money. What we do know is that we actually hit the legal debt ceiling May 16th. But the Treasury has been able to juggle money to make ends meet-largely through accounting gimmicks and borrowing from government accounts (like civil servants’ pension funds). The Treasury estimates that it will run out of wiggle room on Aug 2. This is why stalling, gaming, and procrastinating are so serious. We may go into default without meaning to.

So if the government defaults, what happens? We don’t really know, but history offers guidance. In past instances when we have approached this limit, the markets have sometimes responded by starting to charge a larger risk premium in order to lend money to the federal government. This tends to encourage speculation on US treasuries in ways similar to what just happened with the housing market. You will start to see nations take out insurance on US debt which is a way of betting against our ability to make our debt obligations. This will further deepen our troubles.

Historically there have been many defaults and banking crises. Since 1800 France has had 12 years of banking crises, Norway 16. We had our own in 1936. Germany has spent 16 years in default or restructuring since 1800. Most victims suffered after wars. In this way, we are no exception. Usually, when there is a default, 6 things can effectively address a crisis. 1) Get a higher GDP.2) Lower interest rates on public debt.3) Get a bail out- go to the IMF or hope a friend will help you.4) Tax increases and cuts to public spending (i.e. entitlements).5) Print more money6) Default totally. This will mean one of several things. We will a)reschedule our interest payments, b)put moratorium on paying c) restructure the debt, etc.

Items 1-2 have already been exhausted. We are practically at 0% interest now. And in a recent interview with one of Fed Chairs, he said it was time to start raising rates to encourage savings. When loan rates are low, so are interest rates on savings accounts. Item 3 was tried, but not announced. China purchased $7.6 bil. in bonds from the US Treasury back in June. That was China’s first increase in bond purchases since October. It now has $1.15 tril. in US holdings. This came after it sold US bonds for 5 straight months.

That leaves us with 4-6. Number 4 is the crux of the current debate. We will have to do both. But Congress is now looking for which groups they can slaughter with the least political consequence to themselves. We have already done 5 to some extent. For the Treasury to do Quantitative Easing, it basically bought back debt using newly printed money. And now we are on the brink of number 6.

So what has happened to other nations who defaulted? Well look no further than Europe today and the EURO.1) Military spending is usually the first on the chopping block. Notice that we are arguing now with Europe over its lack of military funding. And we are looking to cut ours. Fine with me.2) If there is a default or restructuring, there are usually increased conflicts with creditors. This leads to political & economic instability. Notice that there has been talk of the end of the Eurozone because the Germans are quite angry at the Greeks and Irish. See Cartoon for other possibilities.3) Investors are dumping the Euro and running to the Swiss Franc. And they are dropping the dollar as well. The value of the Swiss Franc has been on the rise for over a year. One year ago, I was in Switzerland getting a SFr1 to $1. We were there for 3 weeks and by the end, we were getting SFr.96 to $1. Today, it is SFr. 817 to $1. And China has been pushing for a second reserve currency.

This will devalue the dollar and increase inflation across the board. Basic economics tells us that inflation leads to less job creation, higher prices, increased poverty, and capital flight. It would have a much worse effect that any tax hike because it would be broad-based and not necessarily controllable. Time for the House to get their collective heads out of their asses. Pass a Ceiling, then work on the 2012 budget with austerity measures and tax hikes.

Sunday, July 17, 2011

Rupert Murdoch is one of the most powerful men in the world. The Australian media mogul has used his massive presence in the world media market to push a right-wing/populist agenda, often with a cheap dedication to sensationalism and slight regard for facts. He owns News Corp which itself owns several newspapers in the UK as well as the Wall Street Journal and Fox News here in the US. Murdoch also is the plurality stock holder of Sky TV and only backed off a recent attempt to take complete control of Sky just this past week.

There is a growing scandal brewing in the UK about newspapers (tabloids), owned by Rupert Murdoch's NewsCorp company, have been systematically hacking into peoples' private telephones to gather information. It has also come out that they've hacked the phones of the families of British war veterans killed in action, murder victims (obstructing an investigation in the process), the Royal Family, and members of the British Government including former Labor PM, Gordon Brown. There are also reports that News of the World hacked the phones of 9/11/2001 survivors. This is highly illegal and to prevent their being prosecuted about it, they bribed very high level officials in the British police forces to prevent them conducting investigations. This has begun to spread. The manager of the News of the World (the Murdoch owned tabloid where the scandal first emerged) has resigned and has since been arrested. The chief of the London Metropolitan Police has resigned. The Sunday Times has also recently been implicated in the spreading scandal. On this side of the Atlantic, Murdoch's man running Dow Jones and the Wall Street Journal (two other divisions of Murdoch's empire) has also resigned. Make no mistake these resignations are both members of Murdoch's inner circle.

The FBI is now investigating whether US based divisions of Murdoch's media empire participated in any illegal practices overseas (which is a violation of US law). It would not surprise me at all to find out that Fox News has been engaging in the same kind of phone hacking and bribery of officials for information here in the US. For dedicated Fox News viewers, it won't matter. But anything that weakens Rubert Murdoch and his media empire is good for democracy and good for Democrats.

Thursday, July 07, 2011

There is an article in The Economist (see link here), in which they lay the blame for the failure to resolve the deficit reduction dispute (and the related debate about the debt ceiling) squarely at the feet of the Republican Party and their refusal to consider tax increases as part of the response to the current accounts problem. This is surprising because The Economist is normally squarely on the right side of the political spectrum with regard to fiscal and economic policy. I would go further than The Economist though. I would say that not only is the Republican Party responsible for failing to solve the problem, they are responsible for creating it in the first place. Furthermore, the lack of sophistication among the national press corps has allowed the Republicans to frame the situation as an existential crisis by making baseless comparisons between the US debt and Greece's debt. At the same time, there is very little coverage of how low our tax rates are relative to other industrialized countries and relative to our own past.

According to The Economist article above, US tax receipts as a share of GDP is around 15%. To put this in perspective, I looked at the tax receipts data from the OECD (see data sheet here). The numbers from the OECD are a little different than those quoted in The Economist. OECD says that tax revenues as a share of GDP are at about 24%. According to the OECD, 24% is the lowest share of the national economy taken in taxes in the USA since 1965 (the first year for which data is reported in the table). What's more, 24% is among the lowest share of GDP taken in taxes for any OECD country since 1965! Only relatively poor OECD members such as Chile, Korea, Portugal and Turkey have lower tax/GDP ratios in their history. What's more, these countries' lowest tax/GDP ratios occurred when they were better considered as developing countries than wealthy industrialized countries (and in the cases of Chile, Korea and Turkey largely before they were democracies). Many of the countries that have similar or superior growth rates to the US tax their economies more heavily. So contrary to Republican rhetoric, we are not over taxed by any meaningful measure. At the same time, Republicans are also on thin ice when they argue that increasing our tax rates will undermine the overall economic health of the country.

What about our spending levels? According to Visualeconomics.com, the US government budget takes up about 21% of GDP. The Economist says that number is about 25%. Regardless of which figure you use, that's much lower than most industrialized democracies. So it is not the case that our spending per se is especially high or "out of control" relative to our peers. Again, the Republicans are distorting the real situation to make their case for protecting low tax rates the wealthy and corporations at the expense of public services that benefit society as a whole (like education, health care and infrastructure).

What about our debt levels? To hear Republicans talk about it, the United States is a global laughing stock because of our debt levels. Even if we accept the Republican premise that we couldn't solve our debt problem overnight by returning our tax rates back to the 1990s levels (27% to 29% of GDP), are we really in the midst of a crushing debt crisis? According to the OECD (see link here), our debt as a share of our GDP is at 74% for 2011. To put this in perspective, that's about the same debt level as found in Ireland, Portugal which are in fiscal crises but lower than Belgium (80%) and Japan (127%) which, because they are larger more advanced economies, not in fiscal crisis. Greek debt is at 125% of their GDP.

It's worth pointing out here that a number of countries that Republicans love to vilify for their supposedly budget busting welfare states have much better debt situations than we do with little to show for our borrowing other than a bloated military. Denmark's debt is only 2.7% of their GDP. Canada's is 33.7%. Germany's is 50.2%.

For all these reasons, I think we should think about the current situation with regard to taxes, spending and debt as a "Republican Crisis," rather than a genuine "Debt Crisis."